The MicroFinTech opportunity at the Bottom Of the Pyramid
Twenty years ago I attended the first MicroCredit Summit in Washington DC. From all around the world, practitioners, NGOs, consultants and governments came to discuss the potential of a new tool for poverty eradication — micro-finance.
Micro-finance is all about delivering financial services to the traditionally excluded — the marginalised and poor.
Its astonishing discovery has been that people living on incomes at the “bottom of the pyramid” turn out to be very good customers, paying back loans with minimal arrears. It seems there are billions of honest, hard-working people looking to earn their way out of poverty. They just need a fair opportunity. Who knew?
Twenty years on and micro-finance is well established. So much so that for-profit hedge funds are getting in on the act, attracted by 50% returns on equity.
Now with developments in FinTech the micro-finance space is about to get a whole lot hotter.
What holds back micro-finance today is the cost structure — if it costs you £50 (in salaries, office costs etc) to lend someone £100, and they only pay you £20 in interest — it doesn’t take a genius to realise the sums don’t add up.
That problem of cost structure is one of the main reasons profitable, private sector micro-finance still remains fairly niche.
But that is about to change. Think about the cost structure so far, think what it has been based on — existing banking technology — paper forms, bank managers, branches, branch officers, clerks on scooters visiting farmers in remote villages. All expensive (in technology terms) physical activities.
“MicroFinTech” (FinTech focused on micro-financial services) sweeps that traditional cost structure away and can operate without the fat overhead of a bank, fund or insurer.
Through technology it can instead grow via the near zero marginal cost of delivering software to a new user.
This year I signed up to Monzo, a new fintech bank that operates only via a smartphone, but every time I use it I am thinking more like a user than I as a banking customer. “I can freeze my card every time I mislay it? Cool! Now what else can it do for me?”
By leveraging technology — smart phones, peer authentication and, possibly, crypto-currencies (Bitcoin: Banking the Unbanked At the Bottom of the Pyramid) — the cost of delivering a microfinance service drops sharply. And as the cost drops, the cost-benefit ratio improves. Micro-finance suddenly looks like a very profitable, and very large opportunity.
Let’s just look at how large it is:
Of the 4.6 billion people old enough to have a bank account, less than 1/4 are catered for by traditional financial institutions. (Financial Inclusion at the Bottom of the Pyramid)
Let’s look at that visually:
That leaves an astonishing 3.5 billion potential customers of MicroFinTech services.
3.5 billion potential customers who have either have no existing financial services providers (2.5 billion unbanked) or just a non-transactional savings account (1 billion). Imagine the market frenzy that 3.5 billion new entrants to the banking market could cause!
That’s people who need financial products — insurance, overdrafts, mortgages, working capital, seed capital, money transfer, investments and pensions…
We’re talking about a green field opportunity with 3 times the number of customers of the entire existing financial system.
With a market that size, nearly twice the size of Facebook’s user base, (I know right and how big is Facebook now!) it’s a wonder to me that there aren’t more entrepreneurs talking about the MicroFinTech opportunity at the Bottom Of the Pyramid right now.
